The Depth of the Next US Recession

Whatever the immediate trigger of the next US recession, the consequences are likely to be severe. With the US government committed to pro-cyclical fiscal, macro-prudential, and even monetary policies, the authorities are in a weak position to manage the next inevitable shock.

ASPEN, COLORADO – The United States economy is doing well. But the next recession – and there is always another recession – could be very bad.

The US Bureau of Economic Analysis estimates that GDP growth in the second quarter of 2018 reached 4.1% – the highest since the 4.9% seen under President Barack Obama in 2014. Another year of growth will match the record ten-year expansion of the 1990s. Add to that low unemployment, and things are looking good.

But this cannot continue forever. Given massive global corporate debt and a soaring US stock market – the cyclically adjusted price-to-earnings ratio is high by historical standards – one possible trigger for a downturn in the coming years is a negative shock that could send securities tumbling.

Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He is a research associate at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.

Since a failed coup attempt in the summer of 2016, Turkish President Recep Tayyip Erdoğan has amassed unprecedented power. Yet, thanks to Erdogan’s incompetence, Turkey's future now seems to rest more with financial markets and other regional powers than with its strongman.

The limits to Fed’s stimulus in negative real interest rates are set by the expected rate of inflation and the zero nominal interest rate bound. Raising target interest rates now will lower inflation and expected inflation. If providing space for expansionary policy is the priority then the Fed’s target inflation rate should be raised.

Things will get most interesting going forward. Much will depend on the amount of wealth that is able to escape the next large economic crisis. This is very important because it will set the bar that determines the rate of inflation or deflation in coming years. Pensions, annuities, and even investments in stocks and such all fall into the area of paper promises that are often recorded somewhere far from sight as a digital entry on a computer.

The amount of wealth stored in these intangible areas based on faith have grown at a massive rate during the last several decades and were relatively minor players until recently. Currencies, also known as fiat money, are also just IOUs or paper promises. The article below delves into what might be left standing after the next financial meltdown.

And how exactly does a country with fiat currency 'run out of fiscal space'? The only difference between dollars and treasury bonds is that bonds pay interest. The Fed has complete control over the yield on bonds by being able to purchase an infinite amount of them. The 'national debt' became meaningless as soon as we left the gold standard. The only relevant concern when it comes to government spending is the availability of real resources (water, oil, sand, labor, ect) because spending beyond the productive capacity of the country would just generate inflation. I'm starting to think someone should require economists to spend one year forcibly unemployed but required to keep looking for jobs so that they could get a feel for just how evil it is to continue advocating for the forcible unemployment of 4% of the workforce as a way to stop inflation. Any level of unemployment is a policy choice, and involuntary unemployment is probably one of the most sadistic things you can do to someone. The government can always afford to hire it's own citizens, refusing to do so because economists didn't notice we left the gold standard is unforgivable.

Venezuela shows the limits of expansionary monetary policy. At the limit expectations of inflation will lower real balances so far that new finite amount of money printing can cover the government’s deficit.

'Even China is vulnerable to slowing growth and high levels of debt.' Indeed it is, but its vulnerability is literally an order of magnitude lower than any major economy. Their officials' experience and confidence is evidenced by their Babe Ruth style ability to call their shots and put the growth right where they want it–year after year, decade after decade. With the trust and support of 90% of their people, they can handle almost anything.

Understanding the importance of the recession in the cycle in the so called capitalist economic system based on profits and debts would help more than worrying about something that is a natural effect of the system. Growing economic output is higher profits equal higher debts. Shrinking economic output or recession is negative profits but also reducing the debts. When corporate profits are negative than incomes are higher than spending therefore savings can be higher or reducing the past debt with the extra income can help start sending again.

Barak Hussein Obama inherited a catastrophe from George Duboy Bush. Unemployment was 11.3%, DOW hovering around 6,000 and the bottom had completely fallen out of the housing market thanks to Bush's feckless failure to effectively steer America out of it's worst financial mess since the Great Depression and some have the nerve to try blame anything on President Obama. In less than 4 years from now you'll be wishing for Obama a steady hand to manage America out of the next financial mess!

Inherited a catastrophe does not give a person the right to make it worse which Trump has also continued to do. Clearly, running up debt is far easier than paying it off. As things stand America continues to rack up a deficit each year of nearly $2,500 for every man woman and child in the country, such deficits were unheard of in the past unless it was during a major war.

The fact is with the artificially low-interest rates of today many people seem to have little desire to cut spending. We are literally gorging on debt, and most Americans seem to think that it is just fine and dandy to wildly run up debt as if there is no tomorrow. More on this topic, and some ugly numbers, in the article below.

Thank you for ringing the bell to alert us to the massive and growing debt given policy decisionsthat exclude any wiggle room. Possibly, we could encourage the wealthiest to lead the way in debt reduction by overpaying for future advantages and reduced spending. Conversely, we could sell NYC, LA, and Chicago to the Chinese.

China has numerous challenges itself....the failed Barrack Hussein Obama administration supporting Tehran, the Muslim Brotherhood and the PLO have led to Turkey and others shunning the West and it will be an increasingly nationalistic Germany who will successfully challenge Tehran, yet global conflagration certain quickly evolving....what a pity humanity has to be so corrupt and turning a deaf ear to the lessons of history.

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